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) -- The bank stock rally was good while it lasted. The question is whether mortgage lending can continue to fuel earning growth expectations, as Wall Street based earnings remain muted. There's reason to be cautious.

This week, the

MBA Mortgage Applications

index showed a sharp week-over-week decline, punctuated by a 4.3% fall in the Market Index and a 5.7% drop in the Refinance Index. Compared with year-ago-levels the indices were up by over 20%. "This was the fourth consecutive week of declining refi activity," wrote KBW analyst Bose George, in a Thursday note to clients.

"We believe that the decline in the refi index over the past four weeks highlights that organic refinance volume could be vulnerable if rates trend up," added George, who notes that HARP volumes are less rate sensitive and that a drop in rates could reverse the slowdown.

Without trying to time trends or when the music will stop on HARP refinancing, investors should pay attention to underlying trends. While weekly data shows refinancing is up nearly 30% compared with year-ago levels that compares poorly with 75.9% rise year-to-date.

For the nation's largest mortgage lenders like

Wells Fargo


, recent refinancing and interest rate data is tempering earnings expectations. Stifel Nicolaus analyst Christopher Mutascio recently cut estimates on Wells Fargo's mortgage origination revenue from abnormal second quarter levels to what investors should expect in a normal housing environment.

"We cut the company's 2Q12 mortgage origination activity by 40% from $131 billion to $78.6 billion, which we believe represents a more sustainable level of quarterly production for the company that maintains over 30% of the country's mortgage origination market share," wrote Mutascio, in an Aug 8 note. Mutascio also cut Wells Fargo's expected gain on sale margin from 2.20% to 1.50%, but highlighted increasing margins for mortgage servicing.

"We believe the potential/eventual decrease in mortgage banking production and lower gain on sale margins is very manageable with higher servicing income, lower provisioning for loan repurchases, lower compensation expense, lower foreclosed property expense and lower operating losses providing substantial, if not complete, offsets," added Mutascio.

While the report states 2012 and 2013 earnings per share estimates for Wells Fargo may hold, it also is a clear signal that the booming mortgage market shouldn't be counted on as a durable source of earnings growth for large cap banks.

In fact, Fred Cannon of KBW is pessimistic about the mortgage market over the long haul, as refinancing can't offset a still weak housing market.

In contrast to the Treasury's growing success in HARP, "booming refinancing at lower interest rates, mortgage principal reductions outside of foreclosure and short sales remain elusive, however, as evidenced by recent disagreement on principal reductions between the FHFA and Treasury Department," he writes.

As bank investors brace for the second half of 2012 and a fresh start in 2013, there is good reason to be skeptical whether mortgage refinancing is a long-term growth area.

-- Written by Antoine Gara in New York